DLA director calls for $13B in budget cuts

Aug. 25, 2013 - 06:00AM
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Sherrill Benson, a property disposal specialist with the Defense Logistics Agency, loads computers at Rock Island Arsenal, Ill.. Defense contractors are expected to play a key role in the so-called 13-in-6 strategy announced by DLA Director Vice Adm. Mark Harnitchek at an industry meeting earlier this month. (Jasmine Phillips / ASC Public Affairs)

The Defense Logistics Agency plans to slash $13.1 billion in operating and material costs over the next six years.

Defense contractors are expected to play a key role in the so-called 13-in-6 strategy announced by DLA Director Vice Adm. Mark Harnitchek at an industry meeting earlier this month. The strategy builds on last year’s efficiency efforts but extends cost-cutting measures an additional year through 2019.

Keeping pace with last year’s plans, major tenets of the new strategy include:

■Partnering with industry to reduce excess inventory and increase use of reverse auctions.

■Consolidating and co-locating infrastructure, including limiting the number of DLA warehouses.

DLA said it manages 26 distribution centers worldwide and more than 5 million items, including food, uniforms, medical supplies, military spare parts and fuel. According to DLA reports, Harnitchek told industry leaders the agency will likely face budget cuts over the next 10 years and will be forced to reduce its inventory levels, especially excess inventory.

“We have too much inventory,” Harnitchek said at the meeting. DLA has “about $14 billion of inventory for lots of reasons and probably half of that is excess to what we need; ... and it does cost money. It costs the money to buy it, and it costs a lot of money to hold it,” he said.

DLA reduced that number by $3.6 billion this year, spokeswoman Tonya Johnson said. The agency projects its inventory level will be $11.7 billion in fiscal 2014, when adjusted for inflation.

The agency’s distribution operation costs about $2 billion a year, and Harnitchek estimates nearly half of that is infrastructure costs to maintain items.

“We can’t afford to have stuff we just don’t need. This is an example of money that will go back to the services,” he said.

Backed by DLA research and development funding, nonprofit consulting firm LMI created a software solution to manage DLA purchasing of items with infrequent demand levels and highly variable demand. Jeff Bennett, LMI’s senior vice president for logistics management, said these types of items comprise a large part of DLA’s active inventory and include parts for critical weapon systems that must be bought, managed and readily available for military use.

“When you’re trying to keep up with demand and it changes, oftentimes you’re stuck holding inventory that is excess, ... [and] it happens for many valid reasons,” Bennett said.

Inventory can become excess if the agency doesn’t think it can sell an item over a given time period, Bennett said.

“Our support of DLA has been on the buying side ... [and] doing better forecasting so you don’t buy something you don’t need in the first place,” he said.

The LMI solutions, known as Peak and NextGen, were implemented in January and are now used to set inventory levels for about 60 percent of the roughly 800,000 DLA items that are in low demand or that have highly variable demand. Those items include repair parts for aircraft, ships, land vehicles and other equipment, said Michelle Kordell, a director in LMI’s Logistics Analysis program group.

LMI is currently hosting the software solutions and providing them as a service to DLA, but Bennett said the software will eventually be embedded in DLA’s enterprise resource planning system.

Within the first four months of implementing the software, the amount of on-hand inventory has decreased by 11 percent, Kordell said. The number of canceled procurement requests used to initiate a purchase dropped by 40 percent during the same time period.

“DLA is buying less often and with more accuracy,” she said. “Because the demand for these items is inherently unforecastable, buying to forecasts was less efficient than buying to the ... recommended levels” by LMI’s software solutions.

LMI expects its software will reduce the number of unfilled orders from DLA customers by 30 percent, reduce the procurement workload by 50 percent and drive down inventory costs by $180 million.

DLA’s goal is to reduce procurement requests by at least 25 percent, according to LMI. How these reductions will affect DLA’s 27,000-person staff, in addition to contractors, is unclear.

Here’s how the LMI solutions work: The Next Generation Inventory Model helps DLA decide when to buy items and how many, based on algorithms derived from customer demand data for particular items. The Peak Policy helps DLA balance the risk of not having an item in stock or buying too much.

While the software’s benefits amount to a small portion of DLA’s multibillion-dollar reduction goal, the savings add up.

“We’re tracking this pretty close,” Harnitchek said of the larger strategy. “We have specific targets that we have to meet, and we track these on a daily basis.”